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Optimizing small business lending: Best practices and strategies

Kate Randazzo
May 2, 2024
Read Time: 0 min

Boost your small business lending efforts from the bottom up

Small businesses play a crucial role in our economy, and one of the critical factors in their success is access to funding.

You might also like this guide for smarter, faster small business lending.


Policies and procedures

Small business lending loan strategy

When it comes to small business lending, the importance of a bank's loan policy cannot be overstated. This policy serves as a set of guidelines that outline the rules and expectations for the credit function within the bank or credit union. It sets the tone for the institution's approach to risk appetite, risk tolerance, lending philosophy, and organization of the lending function.

Here are some key reasons why a bank's loan policy is crucial for effective small business lending:

  • Risk appetite: The loan policy helps lenders understand the institution's willingness to take on risk and what kinds of lending opportunities the bank is looking for. This knowledge is essential for making informed decisions about which small business loans to pursue.
  • Organizational structure: The policy outlines the organizational lending function and the process for how deals get approved. This structure ensures that the lending process is efficient and follows a standardized approach.
  • Compliance and risk management: The loan policy ensures that the lending function operates within the regulatory and compliance framework. It also outlines the risk management practices that need to be followed when evaluating small business lending opportunities.
  • Loan portfolio building: By understanding the loan policy, lenders can align their efforts with the institution's goals for building a high-quality loan portfolio. This includes defining the threshold for material loans or transactions and structuring the lending process accordingly.

Overall, the bank's loan policy serves as a foundational document that guides the entire small business lending process and ensures that the institution's lending efforts are aligned with its strategic objectives.


How differential credit analysis can improve small business lending

Small business lending involves a complex process of analyzing the borrower's financial situation and predicting their ability to repay the loan. The following key aspects of differential credit analysis are crucial for effective small business lending:

  • Customizing the lending process: Recognizing that small business loans come in various sizes and complexities, it's essential to tailor the lending process to the specific needs of each borrower. This includes using a streamlined underwriting process for smaller, less complex loans and a more in-depth process for larger, higher-risk credits.
  • Understanding financing needs: Assessing the borrower's financing needs is essential for determining the most suitable loan structure. This involves differentiating between temporary and permanent investments in current assets, as well as anticipating future needs based on the borrower's growth and operational cycles.
  • Financial analysis fundamentals: Conducting thorough financial analysis is critical for evaluating the borrower's ability to repay the loan. This includes assessing the borrower's income statement, cash flow, working assets, liabilities, and leverage to determine their financial stability and risk profile.
  • Quantifying the 5 C's of credit: The "5 C's of credit" (character, capacity, capital, conditions, and collateral) are key factors in credit assessment. Using quantitative measures, such as FICO scores, debt service coverage, and collateral margin, can help in quantifying these essential credit components.
  • Structured approach to cash flow analysis: Analyzing cash flow is vital for understanding the borrower's ability to meet debt obligations. Employing various cash flow analysis methods, including traditional cash flow, expanded EBITDA, and global cash flow, can provide a comprehensive view of the borrower's financial position.

By implementing a differential credit analysis approach, financial institutions can enhance their small business lending practices and build stronger, more profitable relationships with their small business borrowers.

Retention and growth

Adding value to your small business lending relationships

Sometimes daily operations get in the way of banks and credit unions seeking out opportunities to add value to their lending relationships. By identifying these opportunities, institutions can build stronger, more profitable relationships with their small business borrowers. Here are some key strategies for adding value:

  • Transform the credit process: Financial institutions can transform the credit process from being perceived as a cost to being seen as a benefit. This involves educating borrowers about the institution's underwriting and approval process, which can help them understand the importance of providing all necessary information upfront.
  • Identify opportunities to help borrowers: Good bank business strategy adds value to the borrower's business and improves customer retention. Financial institutions can offer industry insights and benchmarking reports to their small business customers. They can also improve the efficiency of the operating cycle, restructure debt to improve cash flow, and anticipate future financing needs based on growth projections. 
  • Integrate a lifecycle relationship management plan: Institutions should develop a plan that aligns their products and services along the borrower's lifecycle. This allows for proactive identification of opportunities to meet the borrower's evolving needs, such as growth financing, succession planning, and wealth management.
  • Use financial statements to demonstrate benefit: By using financial analysis tools, lenders can demonstrate the potential financial benefits to the borrower. This may involve identifying cost-saving opportunities, improving cash flow, and offering tailored financial solutions to address specific needs.
  • Pricing and negotiation: Lenders can negotiate pricing based on the value provided to the borrower. This involves understanding the competitive landscape, assessing the lifetime profitability of the relationship, and making strategic decisions regarding the pricing and terms of the loan.
  • Nurture lifetime customer relationships: Institutions can focus on managing relationships with high-potential customers while also looking for opportunities to increase the profitability of lower-potential customers. This may involve repricing, optimizing costs, and making strategic decisions to enhance overall relationship profitability.

Focusing on small business lending relationships requires dedication, and small business loan origination software can help free up lenders' time for building and maintaining those relationships.


Efficient processes lead to long-lasting small business relationships

Small business lending requires a structured approach to assessing lending opportunities, understanding financing needs, and transforming the credit process from a cost to a benefit. Financial analysis, differential credit analysis, and a clear process for assessing lending opportunities are critical components of effective small business lending. Additionally, managing lifetime customer relationships and negotiating pricing based on the value provided to the borrower are key strategies for optimizing small business lending practices. By adding value to the lending relationship, financial institutions can build stronger, more profitable relationships with their small business borrowers.

Win more small business deals and grow market share.

abrigo small business lending

About Abrigo Small Business Lending Intelligence 

Abrigo Small Business Lending Intelligence is a lending decision and monitoring engine powered by Charm Solutions. Embedded into the Abrigo loan origination platform, Abrigo Small Business Lending Intelligence provides real-time scorecards that include a loan risk rating score, probability of default, and details of how the score was calculated. Using Charm’s dynamic models along with existing processes, institutions improve their decision-making by incorporating an array of data sources and leveraging analytics to gain actionable insights. 

About the Author

Kate Randazzo

Content Marketing Manager
Kate Randazzo is a Content Marketing Manager at Abrigo, where she works with industry thought leaders to create digital content that helps financial institutions better serve their customers. Before joining Abrigo, Kate managed social media and produced articles for Campbell University’s quarterly magazine and other university content initiatives. She earned

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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